While Deri provides decentralized derivatives trading, it allows users to tokenize their positions and gain more composability.
Author: face-to-face
In 2021, DeFi (decentralized finance) will continue to be hot in 2020, especially in the past two days, leading DeFi projects such as UNI, SUSHI, and COMP have successively broken new highs, leading the trend of the crypto market in 2021. In this context, how can we seize the opportunity to enjoy the expanding dividend of the DeFi market? Perhaps the new DeFi financial derivatives trading agreement Deri will tell you the answer.
Financial derivatives (derivatives) refers to a financial contract whose value depends on one or more underlying assets or indexes. The basic types include forwards, futures, swaps (swaps) and options. Among them, the more typical underlying assets include stocks, commodities, currencies, indices, bonds or interest rates.
Financial derivatives are essentially financial instruments. The specific reasons why investors trade derivatives include:
- Hedging: hedging against the volatility of the underlying asset;
- Speculation: speculating on the directional movement of the underlying asset or increasing the asset holdings;
- Special needs: It is necessary to indirectly trade certain assets that are difficult to trade directly.
The economic purpose of trading derivatives can be abstracted as: obtaining risk exposure about a certain financial risk conveniently and accurately with a lower capital cost.
Financial derivatives trading has reached maturity
Financial derivatives have developed into a very mature trading method internationally. With the continuous accumulation of global financial risks, global investors’ demand for financial derivatives has become increasingly strong, prompting a wide variety of financial derivatives and a large scale.
Compared with spot products, derivatives have many advantages. For ordinary investors, small capital can be used to obtain large profits and improve the efficiency of capital use. Professional players need more flexible derivatives to effectively prevent risk mismatches and liquidity mismatches.
The responsibility of financial intermediaries is to reasonably match funds according to the risk preferences and conditions of both the supply and demand of funds, and the different expectations of liquidity. As a kind of financial intermediary, most of the centralized trading platforms currently use derivatives trading as the direction of vigorous promotion and the source of profits. According to incomplete statistics, there are currently more than 2,800 digital currency exchanges worldwide, and the average daily trading volume of derivatives in 2021 has exceeded 400 billion yuan.
DeFi financial derivatives are developing rapidly
The Centralized Exchange is a technology platform (other than the blockchain) operated by a team or organization, and is not an organic part of the original blockchain. However, centralized exchanges have existed for a long time, have large traffic, and are friendly to interaction.
Centralized exchange derivatives have the advantages of high efficiency, good experience, large trading volume, and strong liquidity. But at the same time, the many shortcomings of centralized exchanges, such as high security risks (theft of coins, loss of coins, and theft of exchange guards), low cost of evil (swiping transaction volume, joint trading, etc.) are also quite prominent. This is also one of the reasons why the decentralized financial DeFi is so popular.
DeFi financial derivatives have also been developing, and there are also many popular projects, such as Uniswap and Synthetix. Uniswap is currently almost a household name in the DeFi field, but when it comes to DeFi financial derivatives, Synthetix is also a project that cannot be bypassed. It is essentially a synthetic asset (Synths) issuance agreement.
Synthetic assets are a simulated expression of original assets, which is equivalent to a “parallel world” of existing assets, and an alternative way of real assets on the chain. Synthetix currently supports the issuance of synthetic assets including fiat currencies (U.S. dollars, euros, yen, mainly U.S. dollars sUSD), cryptocurrencies (sBTC, sETH), and commodities (mainly gold sXAU and silver sXAG). Synthetix also solves the problem of composability of derivatives.
But Synthetix also has many risks:
- The price of SNX fluctuates, and more tokens may be consumed when exiting the system to unlock;
- Use SNX instead of using ETH as collateral like MakerDao. If the price of SNX drops sharply, the value of the mortgaged assets will plummet, which may cause system problems;
- Lack of corresponding mechanisms (there is no global clearing mechanism similar to MakerDAO for the time being) to protect the interests of asset holders, and there may be extreme situations where synthetic assets cannot be repaid;
- For most people, there is a certain threshold to buy SNX and pledge, and Synthetix needs more people to participate. In addition, synthetic assets themselves also need to explore the introduction of derivatives transactions.
Why do we need Deri Protocol
In summary, we believe that good decentralized derivatives need to have 4 core elements:
- Real DeFi: all core transaction logic is carried out on the chain;
- Real derivatives: users can trade financial derivatives accurately and with high capital efficiency;
- Composability: The risk exposure should be tokenized so that other DeFi projects can easily introduce risk exposures into their own project system;
- Openness: General tokens should be used instead of internal chip transactions.
As a result, Deri Protocol came into being.
Deri is the abbreviation of derivative, which aims to help people trade derivatives on the blockchain. In essence, the Deri protocol provides a decentralized way to allow people to accurately and effectively expose their trading risks. As a solution to decentralize derivatives, the Deri protocol has all the features mentioned above:
- Real DeFi: The Deri protocol is written in the white paper as a set of smart contracts on Ethereum. The process of transaction risk exposure is completely completed on the Ethereum blockchain. According to the latest news from the project party, Deri has confirmed that it will start pre-mining on the three chains (HECO, BSC, ETH) at the same time, instead of only on ETH;
- Real derivatives: position PnL is calculated by the marked price updated by oracle, to ensure that position PnL accurately tracks changes in the underlying price; real guaranteed trading, providing inherent leverage;
- Composability: Positions are tokenized into non-fungible tokens (NFT), users can hold and transfer position tokens in their own wallets, and they can also easily import position tokens into other DeFi items It serves as its basic component to meet its own financial needs (that is, as a music module for their own projects);
- Openness: Anyone can start a liquidity pool based on any functional currency (but usually a stable currency) with any transaction object as the subject. The Deri agreement does not force users to use any specific “home chips”;
- Ease of use: The transaction process of the Deri protocol is very simple and convenient.
The working mechanism of the Deri protocol is similar to that of Uniswap, in that the liquidity pool is used as a counterpoint for traders. The difference is that Uniswap’s liquidity pool for spot transactions needs to hold a pair of tokens for traders to exchange, while Deri’s liquidity pool, as a counterpart to the derivative, only needs to hold the functional currency of the derivative.
Deri is easy to use
Using the Deri protocol, users can conduct transactions with a liquidity pool similar to Uniswap. The process is as follows:
- Open the website that serves as the trading world and connect to the wallet (such as Metamask)
- Select the subject of the transaction (ie select the liquidity pool)
- Choose the direction to open a position (long/short), position volume and leverage (determine the guarantee amount)
- Click the “PLACE ORDER” button and confirm the signature on the wallet
Next, the liquidity pool will process the order and mint a Position token (PToken) to the trader’s wallet address.
For any liquidity pool, oracle is responsible for updating the mark price of its underlying. The Deri protocol supports two kinds of oracles: one is the oracle server under the chain, and the other is the oracle smart contract on the chain.
This design is rare, and it is one of Deri’s design highlights.
Every time there is a transaction or liquidity operation (such as a trader adding or subtracting liquidity or a liquidity provider adding or subtracting liquidity), the liquidity pool will read the latest price from the oracle as the mark price to update position information or calculations Net liquidity share.
The Deri agreement charges fees for positions in the majority of long and short pairs, and rewards fees for positions in the minority, in order to balance the long and short positions. From the perspective of financial strength, the capital fee is essentially the liquidity cost required to perform a transaction.
In traditional order book exchanges, liquidity costs consist of fixed transaction fees (taker fees) and variable market shock costs. The Deri protocol uses the liquidity pool trading paradigm. In the liquidity pool trading paradigm, the majority (liquidity consumers) in the long-short pair pay a fee to the minority (liquidity providers) to compensate for the liquidity they obtain during the transaction. Note that the capital fee is inverse to the total liquidity of the liquidity pool. This is consistent with the characteristics of traditional order book transactions: the better the liquidity, the lower the liquidity cost of the transaction.
The liquidity pool plays the role of the trader’s counterpart in the transaction. The liquidity provider (LP) provides liquidity (standard currency) to the liquidity pool so that the liquidity pool has sufficient liquidity (lower funding rate) when it meets the transaction needs of traders.
In return, LP receives two forms of income: the base currency and the token of the Deri protocol-DERI. Among them, DERI rewards are issued on a proportionate basis according to LP’s liquidity contribution.
The total amount of DERI tokens is 1 billion, of which 60% is produced by liquid mining, and the rest is allocated to the team, investors and foundations. The non-mining part will be released linearly within 2 years. See the figure below for detailed allocation
The Deri agreement will use the agreement token DERI to build a community sharing and self-governance system: the community will jointly own the entire Deri agreement and govern and make decisions on it by holding DERI, and eventually develop the Deri agreement into a decentralized one Integrate the world’s infrastructure.
Users can obtain real DERI (ERC-20 token) by participating in the simultaneous pre-mining on Deri’s three chains. After the pre-mining is started, the four pools on the three chains compete. Which chain reaches the TVL target value first will officially open the transaction and increase the chain reward.
Participate in Deri’s new era of DeFi
The Deri protocol provides users with an accurate and effective way to obtain specific risk exposures and provides an on-chain solution originally within the blockchain system. Using the Deri protocol, the user’s desired financial risk exposure is tokenized into a position NFT.
The value of this position token is updated by the liquidity pool that casts it to accurately track the rise and fall of the underlying price to meet the needs of users to obtain risk exposure. Position tokens minted through the Deri protocol can be used as infrastructure to introduce other DeFi items to help them realize their own financial functions.
Therefore, the Deri protocol completely provides the integration functions provided by the traditional integration world derivatives on the blockchain. It is foreseeable that Deri is about to open a new era of decentralized derivatives.
Regarding the overall progress of the Deri Agreement. The Deri agreement has been developed in Q4 of 2020 and will be officially launched in Q1 of 2021. In order to facilitate user participation, Deri announced their recent development plans:
- In early February 2021, the team plans to participate in Sushi’s hot spring plan to realize SUSHI’s dual excavation, and it is already on the list of Sushi’s February Onsen plan. For the specific opening time, please pay attention to the relevant news of Sushi. At the same time, Deri will also launch a pre-mining TVL competition, including four pools of USDT, BAC, BUSD, and HUSD on three chains.
- In mid-to-late February, after the TVL competition ends, it will be directly transferred to the official trading.
- 2021 Q2 launches other types of derivatives (expiring futures, options)
- 2021 Q3 launches Layer 2 solution
Website: https://deri.finance/
Among them, the priority of Q2 and Q3 plans may be adjusted according to the situation. Users can participate in Deri at all stages according to their own needs. Of course, for DeFi projects, the top mine must have a higher relative profit. However, in the face of a new era, it is never too late to participate. After all, what is more a pity than missing it?
